CORPORATIONS (AND OTHER BUSINESS ORGANIZATIONS)

1. CORPORATIONS(AND OTHER BUSINESS ORGANIZATIONS) Daniel B. Graves Graves & Associates LLC May 23, 2007

2. Class Session Agenda • Overview of “Corporations” • Why the “Corporations” Course is Probably Important to You • “Corporations” Course Overview—What We Are Planning to Study This Semester • (Continued)

3. Class Session Agenda • Partnerships • How many have already had the Agency and Partnerships course? • Formation • Partnership Agreements • Authority of Partners • Liability of Partners • Partnership Interests and Property • Fiduciary Duties of Partners • Partnership Dissociation, Dissolution, and Winding Up

4. INTRODUCTIONS WHO AM I? WHO ARE YOU?

5. Who’s Teaching this Class? • Dan Graves, Founder, Graves & Associates LLC, Birmingham, Alabama • Previously, Partner, Balch & Bingham LLP, Birmingham, Alabama • Previously, Associate General Counsel and Assistant Corporate Secretary, Compass Bancshares, Inc., Compass Bank, and their affiliated corporations • Previously, Partner/Associate, Miller, Hamilton, Snider & Odom, Mobile, Alabama

6. Who’s Teaching this Class? • Chairman and Planning Committee Member, ABICLE Southeastern Corporate Law Institute; ABICLE Corporate Governance and Banking Law Planning Committees • Former Special Prosecutor for Alabama Securities Commission and Mobile District Attorney • University of Alabama, J.D. and B.A. • Alabama Law Review, Managing Board and Student Works Editor

7. Who’s Teaching this Class, Anyway? • Author of corporate/securities law related law review articles and other articles • Frequent lecturer/teacher on corporate, securities, and banking law topics

8. Class Meetings • 12 class meetings—11 classes + final exam • Held on each Wednesday evening from 6:30 ‘til 8:40 P.M. • Final exam on August 15th

9. BSL Attendance Policy Reminder • Law students must attend at least 2/3 of all class meetings • Absence from more than 4 classes means that you will not have the pleasure of taking the final exam and you will receive no credit for the class

10. In-Person Class Time Pursuant to order of the Supreme Court of Alabama, I am required to conduct a minimum time of in-person instruction as a condition to your taking the Alabama State Bar Examination. Please don’t whine to get out early. I have enough stress in my life and I don’t need any more from you. Thank you.

11. Your Grade • Final Exam90% • Writing Assignment10% • Class Participation+ or – one grade level for those who are on the brink. Volunteer... don’t be a deadbeat... get to know me... it will make a difference.

12. The Student/Teacher Contract (or “Here’s the Deal”) “The 4 Ps”

13. Participation Students’ learning is facilitated by participation backed by preparation. The professor learns from students’ participation, questions, and feedback. “There is no such thing as a stupid question.” (I could, however, be proven wrong. Just kidding…sort of.) Be fearless!

14. Preparation If you do not read and analyze the cases and the other assigned material, our class discussion will mean little to you. I will expect and assume that you have read the material. I will call on people. I also want volunteers. If you are unprepared, you also run the risk of being the one who proves me wrong when I said that there is “no such thing as a stupid question.”

15. Presence If you are not present for class, you will not learn as well and you cannot add your unique and interesting insights to any discussion we have in class. If you are late and miss roll call, it is YOUR responsibility to see me after class for notation of your presence. You should not assume that I will remember your late/grand entrance.

16. Promptness Students who enter the classroom late generally disrupt the class and distract the other students as well as the (very easily distracted) professor. Please be on time.

17. PROFESSOR’S RESPONSIBILITIES

18. I owe you… Preparation for class. I intend to put in the time required to be prepared for class.

19. I owe you… A concern for and devotion to your learning. A willingness to listen to you and try to help you however I can. If you don’t “get it,” raise your hand in class and ask me. If you are lost, you can be pretty sure that you aren’t alone.

20. I owe you… To strive to make the course a satisfying development experience that is as interesting and enjoyable as it can be under the circumstances.

21. I owe you… Honesty I will try to do my best up here, but you should not be surprised when it becomes obvious that I don’t know everything. If I do not know an answer to your question, I will say so and I will plan to get back to you.

22. WHY IS “CORPORATIONS” IMPORTANT TO YOU?

23. Law School Graduation “Corporations” is part of the required law school curriculum. You will not get out of here without it.

24. State Bar Exams “Corporations” is tested on the Alabama State Bar Examination as well as other states’ exams

25. Corporate Law Practice If you want to practice corporate/business law, you obviously need to know this subject matter.

26. Plaintiffs’ Law Practice • Corporate entities have most of the money. Per IRS tax returns, corporations generate about 95% of all business revenue. • Corporate entities are the primary targets of plaintiffs’ litigation (see the first point noted above) • Successful plaintiffs’ litigation requires an understanding of corporate legal structures, duties, capitalization, and other corporate law fundamentals. Good trial lawyers are more than just good actors.

27. Business Even if you have no intention of practicing law, an understanding of corporate law will aid you in your business or in your general awareness of business principles. In other words, you might avoid plaintiffs’ lawyers and your Wall Street Journal subscription will be more worthwhile.

28. Course Overview Text “Corporations and Other Business Organizations: Cases and Materials” Concise Ninth Edition by Melvin Aron Eisenberg (Who, I would note, still does not publish a teacher’s manual to tell me what to do. Thanks a lot, Melvin!)

29. Course Overview Other Materials • Statutes, statutes, and more statutes. While they are pretty dull reading, they are the source for most corporate law. (See Course Syllabus and TWEN postings for statutory reading assignments.) • Other TWEN postings; relevant periodicals

30. Course Overview • Partnerships • The Corporate Form of Doing Business • Corporate Structure (Management, Authority, Formalities, etc.) • Stockholder Informational Rights and Proxy Voting • Special Close Corporation Problems • Alternative Orgs: LPs, LLCs, and LLPs

31. Course Overview The Fiduciary Duty of Care The duty of directors to inform themselves and act with requisite care in the discharge of their duties.

32. Course Overview The Fiduciary Duty of Loyalty • The duty of directors, officers, dominant shareholders, and their affiliates to make full and fair disclosure of conflicts of interest and to act in the best interest of the corporation. • Entails disinterestedness, good faith, and fairness

33. Course Overview Insider Trading Statutory and Common Law Liabilities

34. Course Overview Corporate Combinations and Tender Offers • Mergers, P&A Transactions, Stock Purchase Transactions, etc. • “Going Private” Transactions • Tender Offers

35. PARTNERSHIPSA “Quicky Overview”

36. What would be a pretty good, general description of a partnership? An unincorporated business that is owned by 2 or more persons who are partners which operates to make money. Each of the partners has unlimited personal liability for their partnership’s liabilities. Each partner has fiduciary duties to his other partner(s). Each partner is an agent of the partnership and non-partner employees of the partnership are also agents of the partnership.

37. How is a legal partnership formed?

38. Martin v. Peyton (NYCA 1927)Formation of Partnershipsand Partners Compared with Lenders

39. Martin v. Peyton (NYCA 1927) Knauth, Nachod & Kuhne (“KN&K), who were a banking and brokerage partnership, made various poor investments that put them at the brink of bankruptcy. They needed money badly. Mr. Hall, a partner of KN&K, went to his friend, Mr. Peyton, a partner of Peyton, Perkins & Freeman (“PP&F”), and arranged to borrow money for KN&K from PP&F. Messrs. Peyton and Freeman were named as “trustees” for this arrangement. The arrangement was documented in 3 written documents: an agreement, an indenture, and an option.

40. Martin v. Peyton (NYCA 1927) KN&K presumably failed to pay one of its other creditors, Mr. Martin. Mr. Martin sued Messrs. Peyton and Freeman, the “trustees,” and contended that they were partners with KN&K by virtue of the arrangement and, as such, that they were liable for the debts of KN&K, including that of Mr. Martin. The lower court ruled for the defendants and Mr. Martin appealed to this court.

41. Martin v. Peyton (NYCA 1927) What were the particular terms of the agreement between KN&K and PP&F?

42. Martin v. Peyton (NY Ct. App. 1927) $2.5 MM Loan Peyton, Perkins & Freeman Knauth, Nachod & Kuhne (Bankers & Brokers) • (1) 40% of KN&K profits until loan repaid • (2) Right to inspect KN&K books and receive information PP&F thought important • (3) “[T]hey (PP&F) may veto any business that they think highly speculative or injurious” • An option to buy 50% or less of KN&K later • “They may not bind the firm by any action of their own” nor initiate any transaction

43. Martin v. Peyton (NYCA 1927) What was the question presented to the court in this case? “If as a whole a contract contemplates an association of two or more persons to carry on as co-owners a business for profit, a partnership there is.”

44. Martin v. Peyton (NYCA 1927) • In other words, was the nature of the parties’ relationship a partnership or was it just a loan transaction? • The question as presented reflects that this is a matter of contract law. Did their contract, taken as a whole, contemplate a partnership or just a loan?

45. Martin v. Peyton (NYCA 1927) The parties negotiated their agreement extensively. They had capable, careful lawyers who drafted their written agreement. The contract stated expressly that PP&F would “not be liable for any losses or treated as partners.” If this is a contract law question and the contract says it’s not a partnership, wouldn’t the statement of intent in the agreement be determinative?

46. Martin v. Peyton (NYCA 1927) No. “Mere words will not blind us to realities,” the court said. “Statements [of intent] are not conclusive.” Language in a contract that disclaims a partnership is not dispositive. The intent of the parties is determined from all of the facts and circumstances as well as the contract terms.

47. Martin v. Peyton (NYCA 1927) THE FORMULA FOR PARTNERSHIP PARTNERSHIP = the association of two or more persons + to carry on as co-owners + a business + for profit

48. Martin v. Peyton (NYCA 1927) Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”? • 40% of KN&K profits until loan repaid, secured by unmarketable securities: Court said: “In compensation for the loan” PP&F got profits until loan was repaid. Collateral securities instead of cash did not undermine the nature of the transaction as a loan.

49. Martin v. Peyton (NYCA 1927) Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”? (2) Right to inspect books and receive information thought important Court said: “[A] proper precaution to safeguard the loan.”

50. Martin v. Peyton (NYCA 1927) Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”? (3) “[T]hey (PP & F) may veto any business that they think highly speculative or injurious”: Court said: A proper precaution to safeguard the loan. Speculative or injurious businesses enhanced risk of repayment. PP&F could not, however, initiate a transaction or bind KN&K as could a partner.