Partnership Formation – No partnership has been established Court’s Factors: Intention of Parties Profit Sharing Sharing of Losses (Risk) Management (Control) Ownership of Property (Control) Rights of Parties on Termination/Dissolution Conduct/Holding Out to Third Parties Factors Partnership Employment Intention of Parties Express/Writing Profit Sharing Yes (RUPA § 202(c)(3)) But might be wages (RUPA § 202(c)(3)(ii)) Sharing of Losses No – Fenwick has all the risk; Chesire did not invest $ Management No – Fenwick has all the control/managerial Ownership of Property Only Fenwick had ownership rights Rights of Parties on Termination/Dissolution Looked like simple employment termination, 10 days’ notice Conduct/Holding Out to Parties With limited exception, not held out as partners Partnership Formation – Partners v. Lenders – to be Lenders, not partners Also Cargill – Difference is that Cargill actually exercised control Factors Partnership Lenders Intention of Parties Express/Writing Profit Sharing Yes (RUPA § 202(c)(3)) But be interest on loan (RUPA § 202(c)(3)(v))
Management Decentralized (default). Each partner an agent and equal participation in mgmt is default; but can use exec comm. and limit authority by agreement and notice to third parties. Centralized (default). Directors and officers manage the corporation; not shareholders. Separate and specialized functions. Cost Zero. But often good idea to hire a lawyer. Filing fees, typically lawyer fees, franchise fees, etc. Default Rules Extensive. More extensive. Flexibility Very malleable form for carrying on business; most rules are default. Not quite as flexible. Tax “Pass-through” (single). Losses can be passed through for use by partners. Taxed as entity, so shareholders have “double taxation” on distributed earnings; losses usable only by corporation. [Exception: S Corporations] 2. A “promoter” is a “person, who acting alone or [with others], directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer.” E.g., identify and solicit investors, arrange for hire employees for the entity, enter into contracts. Often referred to as the “founder” or “organizer.” Contrast with an “incorporator” who has the limited, mechanical task of preparing the incorporation documents and filing them with the state. Incorporators are often lawyers, paralegals, etc. In contrast to the rules of promoter liability, incorporators are typically not liable for their pre-incorporation acts. Promoter Liability Pre-incorporation Promoters are liable for contracts entered into on behalf of a future corporation, absent a contrary intent. Contrary intent generally requires showing more than just signing “for a corporation to be formed.”
How is this case different from Van Gorkom? – They weren’t selling the company here and they were better informed. Good - X Identified two possible bases for finding that directors acted in bad faith: Conduct motivated by subjective bad faith (i.e., an actual intent to do harm) “Intentional dereliction of duty, a conscious disregard for one’s responsibilities” Gross negligence ≠ bad faith Gave examples of conduct in bad intentionally acting with a purpose other than advancing the best interests of the corporation, intent to violate the law, intentionally failing to act in the face of a known duty to act, demonstrating a conscious disregard for duties. The declined to decide whether there is a distinct fiduciary duty to act in good faith independent of the duties of loyalty and care. Corporate Waste - X Conduct was not even to the standard: “So one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” This is the classic formulation of the test Caremark Claims: In dicta, the court stated that as part of its duty to monitor, the Board must make good faith efforts to ensure that a corporation has adequate reporting and information systems: “A director’s obligation includes a duty … to attempt in good to assure that a corporate information and reporting systems … exists, and that failure to do so …may, in theory at least, render a director liable for losses caused by non-compliance with legal standards.” The opinion described this claim as difficult to win, with liability attaching only for “a sustained or systematic failure to exercise oversight” or “[a]n utter failure to attempt to ensure a reporting and information system.” Although a number of Caremark-type claims have been filed, decisions finding a violation are rare. Most companies now have compliance programs and control systems. What Might an “Adequate” Law Compliance Program Include? Policy manual Training of employees Compliance audits Sanctions for violation Provisions for self-reporting of violations to regulators controls to verify compliance with laws and to give the board the ability to monitor the business In Stone v. Ritter, the Del. Supreme Court addressed Caremark’s validity and clarified good faith and how it fits into the fiduciary duty framework. Caremark Claim: “We hold that Caremark articulates the necessary conditions predicate for director oversight liability: (a) the directors utterly failed to implement any reporting or information system or controls; or